In a meeting recently, the topic of setting safety stock came up with the question being “is there a defined way of setting stock levels”. The answer to that is a straight yes, with theoretical safety set based on a combination of service level, variability and lead time. Safety stock is often viewed as a necessary buffer to maintain service levels and mitigate risks. However, it’s also a significant contributor to inventory costs. If you’re looking to reduce safety stock and inventory levels without compromising service levels or increasing risk, the key lies in reducing lead times. There’s a direct correlation between lead time and safety stock, and tackling lead times can unlock significant value for your operations.

The Relationship Between Lead Time and Safety Stock

Safety stock is designed to protect against variability in demand and supply. The longer your lead times, the greater the variability and uncertainty you’ll face. This forces you to hold higher safety stock to maintain service levels.

Conversely, shorter lead times reduce this uncertainty. By improving lead times, you not only lower your inventory costs but also enhance responsiveness to market changes. This dual benefit makes lead time reduction one of the most effective ways to optimize safety stock.

Proven Ways to Reduce Lead Time

1. SCOR Best Practices

The Supply Chain Operations Reference (SCOR) model offers a comprehensive framework for lead time improvement. Key SCOR practices include:

• Streamlining Processes: Map your supply chain processes to identify bottlenecks and inefficiencies.
• Performance Benchmarking: Use SCOR benchmarks to compare your lead times against industry standards.
• Collaboration and Visibility: Improve collaboration across the supply chain to reduce delays and enhance predictability.

2. Lean Concepts

Lean principles emphasize eliminating waste and streamlining operations. Techniques like Just-in-Time (JIT) and continuous improvement (Kaizen) are particularly useful in reducing lead times.

• Eliminate Non-Value-Added Activities: Use lean tools to identify and remove steps that don’t add value.
• Pull Systems: Align production with demand to minimize overproduction and delays.

3. Value Stream Mapping (VSM)

Value stream mapping is a powerful tool to visualize and analyze your supply chain processes. By mapping the flow of materials and information, you can identify lead time drivers and prioritize areas for improvement. The complete this process, it does require understanding of the process and creativity. This piece is often overlooked, VSM will not give you the answer.. it is a useful tool to highlight clear inefficiencies and help you come up with ideas on how to improve. You need to bring the ideas!

• Identify Bottlenecks: Pinpoint steps in the process that cause delays.
• Focus on Flow: Optimize the flow of materials and information to reduce waiting times.

4. Supplier and Partner Engagement

Suppliers play a critical role in lead time. Engaging with them to improve processes, share forecasts, or implement joint improvement initiatives can significantly reduce lead times. Also selecting new suppliers that are physically closer may lead to higher costs, but the shorter lead times may offset these costs. Be clear on what the big issue you’re trying to solve is. If its resilience & reducing inventory exposure.. then lead time reduction may well outweigh marginal cost increases.

• Collaborative Planning: Share demand data and forecasts with suppliers to improve responsiveness.
• Flexible Contracts: Build flexibility into agreements to accommodate changes in demand.

5. Automation and Digital Tools

Technology can dramatically improve lead time by enhancing visibility and decision-making.

• Advanced Planning Systems (APS): Use predictive analytics to anticipate and mitigate delays.
• Supply Chain Visibility Tools: Real-time tracking and analytics improve responsiveness and reduce uncertainty.

6. Strategic use of Buffers as described in DDMRP

Applying Demand-Driven Material Requirements Planning (DDMRP) is another effective way to manage inventory and lead times. DDMRP focuses on strategically positioning inventory buffers at key points in the supply chain to absorb variability and improve flow. By ensuring stock is available where it’s most needed, DDMRP reduces the need for excessive safety stock while simultaneously shortening lead times. This flow-based approach to setting stock levels aligns inventory with actual demand patterns, creating a more responsive and efficient supply chain.

Case Study: The Impact of Lead Time Reduction

IMI Hydronic Engineering, a provider of hydronic components for HVAC systems, applied VSM to their production flow in their Ljung facility. By mapping the current state of their processes, they identified bottlenecks and inefficiencies affecting their on-time delivery (OTD). Implementing improvements based on the VSM analysis led to reduced production lead times and optimized inventory levels, enhancing their OTD performance.

Conclusion

Reducing lead times is the surest way to lower safety stock levels and inventory costs without compromising on service or increasing risk. SCOR best practices, lean principles, value stream mapping, and supplier collaboration offer proven pathways to achieve this. By focusing on lead time, you can build a more responsive, cost-effective, and resilient supply chain.

If you’d like to explore how these strategies can transform your operations, let’s connect. At Supply Chain Planning.ie, we specialize in applying these concepts to real-world challenges, ensuring you achieve measurable results.